Rising utility and food bills have prompted the Bank's Monetary Policy
Committee (MPC) to raise its expectations for inflation.

The outlook for inflation looks grim – especially for the 70pc of consumers that are already cutting back on everyday expenses such as food and petrol, according to a survey, by Brewin Dolphin, the private client investment manager.

The Bank of England had hoped that it would soon start to fall nearer to its 2pc target, but the minutes of the Monetary Policy Committee published this week suggest otherwise.

Rising utility and food bills have prompted the Bank's Monetary Policy Committee (MPC) to raise its expectations for inflation as measured on the consumer prices index (CPI) gauge, according to the record of its July gathering.

"Despite the fall in CPI inflation in June, it was likely that inflation would rise further, to over 5pc, in the coming months," the minutes said. "In the light of recent developments in utility and food prices, the peak in inflation was likely to be a little higher and come sooner than the Committee had previously expected."

The question is whether inflation really is as evil as the doomsayers would suggest.

Related Articles

Speaking at an industry debate on inflation, Mike Lenhoff of Brewin Dolphin who hosted the event, said: "Modest inflation is good, banks define themselves and their profitability by inflation. It means better interest rates for savers."

Brian Mairs, of the British Bankers Association said that we are paying the price of the 'easy credit era'. "Consumers are more concerned with paying off debt than saving money in these inflationary times. The banks are concerned with reforming and building up their capital bases. There is a disparity between CPI, mortgage rates and savings rates but we're paying the price for the easy credit era.

It may be more in favour of the mortgage owner at the moment, but someone defaulting on their mortgage has greater implications than someone not earning a great rate on their savings.

Such words by Mr Mairs will be of little comfort to savers who are struggling to get any sort of decent return on their hard-earned cash.

Basic – rate taxpayers need to earn interest of 5.25pc on their savings in order to make a real return on their money once CPI inflation is taken into account. Higher rate taxpayers are in an even worse position, needing returns of 7 per cent to stop the value of their deposits being shrunk by inflation. But with interest rates at rock-bottom levels accounts paying such high rates are few and far between.

Andrew Hagger, Moneynet, said: "Even in a cash Isa you need to lock your money away for four or five years to beat inflation. Savers will be miserable for some time."

Yet not everyone is a loser when inflation takes off.

Borrowers are the winners as debts benefit from inflation provided wages keep pace with prices.

For example, a homebuyer might borrow £100,000 as an interest-only mortgage for 20 years. At the end of the term, they will still have to repay £100,000, but it will only be worth £66,760 in real terms today if inflation grew at 2pc a year. With inflation at 5pc a year, the real value of the debt would have dropped even further, to £35,850 in real terms.

Rising wages tends to offset inflation, but many workers are having their pay frozen by cash-strapped employers. In the survey 74pc of people said do not expect their income to rise at the same pace as inflation over the next year.

Certainly those on fixed incomes, such as pensioners and those about to become pensioners have more to worry about.

Nick Fitzgerald, Brewin Dolphin, said: "A £250,000 pension will buy a flat annuity of £14,700 a year. This will soon be eroded by inflation. An inflation-linked one – based on inflation of 3pc – will pay £9,997 now but it will take 14 years to surpass the flat rate of £14,700. For the remaining 21 years you are better off."